Could this be the answer for frustrated savers? New TSB current account pays 5% on balances - and no catches

TSB has launched a new current account that pays 5 per cent interest on balances of up to £2,000, in a bid to attract customers following its split from Lloyds Banking Group.

The account, which is available from the end of March, is relatively catch-free with a low minimum monthly deposit, no direct debit requirements and no annual fee.

The Plus Account could be a good option
for those with smallish deposits that are currently suffering from
rock-bottom low savings rates.

In-credit interest: TSB claims its new Plus account offering 5 per cent interest 'gives customers more and asks for less'.

Currently, the best buy easy access savings account from West Brom pays only 1.35 per cent. A £2,000 balance would only make you £27 before interest after a year, which works out at £21.60 after basic rate tax.

This year's Isas offer little more to savers, with even the top-paying five year fix from Skipton BS offering just 3 per cent. After five years you would make £323.23 from this account, which works out at an average of £64.65 per year.

Moving your money to the TSB current account would make you an impressive £80 after tax in a year.

What are the details of the Plus Account?

It pays 5 per cent interest on balances of up to £2,000 – which means that keeping the full £2,000 balance in the account would earn £100 a year, or £80 after 20 per cent tax. A higher rate tax-payer would receive £60.

The rate is not a bonus or teaser: it will not disappear after a year and the account is open to both new and existing customers. Each customer can open two accounts - doubling their interest to £200 a year, if they can keep £2,000 in each account.

It requires a small minimum monthly deposit of just £500. Most other attractive accounts require between £750-£1000. If you are unable to transfer in the
required £500, you will not be charged a fee but any interest on the
balance for that month will be lost.

TSB does not require customers to
transfer any direct debits to the account, unlike some rival offerings.

Andrew Hagger of Moneycomms says: ‘This combined with the non-requirement for direct
debits to be moved across sets the loophole alarm bells ringing - TSB
could see an influx of consumers opening two TSB Plus accounts and
earning 5 per cent on a combined £4,000 balance, viewing it as an alternative to
poor paying instant access savings accounts.'

It will be open for online and over the phone sign-ups from March 30 and in branch the following day.

What about fees, penalties and catches?

There are some hefty penalties for straying into the red: authorised overdrafts are subject to a monthly £6 fee while interest is charged at 19.94 per cent.

There is a free overdraft buffer, if you do stray into negative credit by accident, but this only protects customers from charges if they go overdrawn by £10.

Overdraft interest is charged at 19.94 per cent. There is also a monthly £6 charge for using an authorised overdraft. Even with the £10 buffer there is little room for mistakes before the charges kick in.

Plenty of better options are available for those looking for an account with a larger fee-free buffer or lower charges. To find out more check out This is Money's guide to the best accounts for overdrafts here.

Interest is calculated daily, and will be worked out using your balance at close of play. If you're able, it might be worth transferring some of your savings to the account to maximise your daily balance - while obviously taking care to avoid temptation and spend it.

Using the debit card abroad also comes with high fees of 2.99 per cent and a £1 fee each time you make a purchase.

The account is only available for online with paperless billing

Best current accounts with in-credit interest. Source: Moneycomms. Correct as of March 10 ** assumes account doesn¿t go overdrawn in 12 month period
*** - £2 monthly fee for this account

How does it compare to rival current accounts?

TSB already has an in-credit interest
offer, which may still be a better option for those with slightly more
money in their current account.

Customers with with the free Enhance feature added to their current account - also offered by Lloyds Bank and Bank of Scotland when you add Vantage - can get up to 3 per cent interest on pots of up to £5,000. This will potentially earn you £150 a year before tax.

Both
accounts pay 1.5 per cent on balances from £1 to £999.99, 2 per cent on
balances from £1,000 to £2,999.99 and 3 per cent on balances of £3,000
to £5,000.

Nationwide does pay interest on a slightly higher balance than TSB of up to £2,500.

But the 5 per cent rate is limited to the
first year - after that any cash in the account will only benefit from 1.25 per cent interest.

Therefore although the first year earnings would be £125 before tax, they would drop to £31.25 in the second year.

In addition, Nationwide requires a monthly payment of £1,000 into the account.

Its worth noting that when any existing FlexAccount, FlexDirect or FlexPlus
customers recommend one of the building society’s current accounts, and
that person switches their main account to Nationwide using the Current
Account Switch Service, both parties will receive £50.

You can recommend 12 friends a year meaning you could earn up to an extra £500.

Best for bigger balances

For those with a higher balance in their bank account, the Santander's 123 current account could be a better option as it pays interest on larger balances than both Nationwide and TSB.

It pays interest of 1 per cent on balances
between £1,000 and £2,000, 2 per cent between £2,000 and £3,000 and 3
per cent on balances between £3,000 and £20,000.

Accountholders also benefit from up to 3 per cent monthly cashback on key services such as
mortgage payments, council tax bills, electricity, gas, mobile and home phone,
broadband and TV packages.But the account comes with a £2 monthly fee.

RATHER HAVE FREE CASH OR ADDED EXTRAS?

There
are a whole host of other tempting offers for accountholders bored of their
bank or just looking for an account which works for them.

Free Cash

First Direct offers £100 to switch to its First Account and a generous £250 interest-free overdraft.

On top of that, the bank is so
confident in its customer service that it will give you a further £100
if you chose to close the account within the first 12 months.

However,
First Direct does not have any branches so if you are the sort of
person who likes to do their banking face-to-face, this account may not
be for you - although you will be able to use HSBC or Post Office
counter services.

The Co Operative Bank recently upped its game, offering a £100 switching bonus and a £25 donation to charity. Its Current Account Plus also offers a decent £200 fee-free overdraft. You will however have to commit to paying in £800 each month into the account.

It also offers a
£250 interest-free overdraft for six months when you switch, fee-free
foreign transactions and free Sentinel Gold cover for your personal
belongings.The account is free so long as you pay in £500, or maintain a balance of £5000,

Nationwide's FlexPlus, a packaged current account,
pays 3 per cent interest and offers benefits including UK and European
breakdown cover, worldwide mobile phone insurance and worldwide family
travel insurance, but costs a monthly fee of £10.

If travel insurance is your main priority the FlexAccount offers free European travel insurance without a monthly fee - but you will have to pay in at least £750 a month.

The deal also includes
access under its Flexclusives to better savings and mortgage rates and
discounted home insurance and personal loans deals.